Financing International Trade
Book by Praeger, 2003
For the past forty years, I have been a student of international financial institutions and markets. The banking system, and especially international banking, has been one of the focal points of my research. One of the major functions of any international bank is the financing of international trade. The international bank is the most instrumental institution in lending to exporters or importers or providing credits for transactions in international trade, whether that bank is a commercial bank in the United States, a merchant bank in Great Britain, or a universal bank in Germany. No matter what the bank is called, it is the key institution in granting trade credits to international traders.
International trade has been an accepted practice among the nations of the world for thousands of years. The Phoenicians carried on trade with faraway countries centuries before the age of Christ. East Africans plied their trade with India using primitive boats. Polynesians traded with neighboring islands hundreds of miles away in the Pacific Ocean. In the Germany of the Middle Ages, traders met at crossroads out the area and exchanged goods. Several of these trading locations emerged into today's cities with stock exchanges now organizing the trade of years ago. These were the so-called Börsen, where specie, foreign exchange, and securities were traded in addition to goods and services. Discovery of precious metals and the desire for spices and other exotic agricultural products enticed the conquistadors from Spain and Portugal to discover new lands. Trade has always been a means to integrate cultures and to satisfy desires for strange products not available locally. The early Dutch trading company, the East Asia Company, may have been the first multinational company, and its shares, listed on the Amsterdam Stock Exchange, may have been the first to be traded on a stock market.
As more and more trade took place, nations became closer culturally, politically, and economically. Regional groupings of countries emerged to facilitate more trade and to integrate political systems. Today, we have a United States of America, the most advanced of the economic and political systems. Europe has its European Union (EU), with political and economic integration and, for fifteen countries, a single currency: the makings of a United States of Europe. An additional ten countries have been invited to join EU. In Asia, the Association of South East Asian Nations (ASEAN) has brought national systems together to achieve common economic goals. The same is true for the Andean Pact countries and the Latin American Free Trade Association in Latin America. The North American Free Tree Agreement links Canada, Mexico, and the United States in a system of economic integration. The latter may be the forerunner of a common market comprised of North, Central, and South America. All these modern day attempts at political or economic integration of national systems have resulted in record levels of world trade. The trillions of dollars of world trade must be financed by some method so that manufacturers have working capital means for further production. Such funding starts with the international financial system of banks and nonbank financial institutions.
The banking system has a dislike for risk. International trade is fraught with a variety of risks. The foreign purchaser may not be able to complete the payments for the goods and services shipped because of commercial problems. Political risk may cause defaults in payments. These political risks may arise from currency inconvertibility, expropriation of plant and equipment by the local government, interference or repudiation of a valid contract between the exporter and the importer, or loss because of violence resulting from civil war, political coup, insurrection, or riots. Public and private institutions are needed to insure transactions against these risks or to guarantee the trade credits granted by trade-financing entities. This book is about this international trade finance system of financial institutions, public and private trade credit guarantee and insurance agencies, and other public and private associations and firms that facilitate international trade and its financing. The emphasis is on the U.S. system of commercial banks, U.S. Export-Import (Ex-Im) Bank, Foreign Credit Insurance Association (FCIA), Public Export Funding